Not to be sensitive about this, but you did not quote the article, you did not extract bits and pieces from it, you did not cite the article, you
didn't even comment at all in your post. This does not seem like an honest mistake, and if it was, then it is still against this forum's policies
(as far as I know).

Heres my pet peeve with SS privatization. The current trend is toward partial privatization. A system where you are allowed to opt out of the
privatized system and and invest in the market. The only people that are 100% certain they will opt out are those who feel they do not need an
economic safety net. In other words a large portion of the population will remain in the old system. So how exactly does putting less money into
Social Security result in a more stable system? Nothing is changing just now the rich get another way to make more money.

I wasn't saying anything about the article being invalid -- I just didn't care for the academic dishonesty. I however disagree; the article is off
in many places.

apologists argue that:
- The current pay-as-you-go (PAYGO) Social Security system is bankrupt.

Strawman, no one argues that the system is currently bankrupt.

- Privatization would be self-financing and have no long run transition costs as you reduce the large future implicit liabilities of the current
system, in spite of the fact that you are creating large transtion costs via privatization. So, it is a free lunch.

I haven't heard anyone argue that it was self-financing.

But this PAYGO system is currently not fully solvent as the aging of the baby boomers generation implies that the current contributions and the
growing Social Security Trust Fund will not be able to fully pay the promised benefits in the current system after 2042. Estimates suggest that these
unfunded liabilities of the current system are about $10.4 trillion dollars. However, these figures need to be put into context. For one thing, this
$10.4 trillion hole over the infinite horizon is $3.7 trillion in present value terms over the next 75 years. Moreover, the entire gap comes from cash
flow deficits after 2042; until then there are no deficits in the current system.

Other thinkers disagree,
"[trust fund assets are not] real economic assets that can be drawn down in the future to fund benefits ... [they are] claims on the Treasury that,
when redeemed, will have to be financed by raising taxes, borrowing from the public, or reducing benefits or other expenditures"
-- Year 2000 Budget Proposal by Clinton

In a Feb 1st USA today article, writer Michael Tanner notes:
"Thus, in less than 15 years, the federal government will have to begin finding billions of dollars to continue paying benefits — by cutting
benefits, raising taxes or borrowing even more money. Overall, Social Security's unfunded liabilities total nearly $12 trillion, and the longer we
wait, the worse it gets. Estimates suggest that each year that we wait to reform Social Security costs between $150 billion and $600 billion more.
"

At the moment, Social Security is running a significant cash flow surplus about $180 billion in 2005.

Yes, but where do you suppose that surplus goes? It's not saved anywhere.

But given the current large build-up of the Trust Fund, the current system will have the funds to pay all expected benefits until 2042. Thus, the
problems with Social Security, from a cash flow point of view do not start until 2042.

As shown above, this reasoning does not hold.

Even after 2042, Social Security is not "bankrupt": at that time, its revenues would still be able to cover about 75% of the promised benefits under
current law. The fraction of promised benefits that can be paid then gradually falls from 75% to 70% in 2080. Thus, even after the Trust Fund is
exhausted, a significant fraction of the benefits can be paid.

Yes, bankrupt is not a good word. Unjust is a better one: It is unjust to give someone less than their promised benefits.-

Of course, we cannot wait until 2042 to fix the problem of Social Security and restore its long-run actuarial solvency. But reforming the curent
system, without any privatization, is a totally manageable problem.

Funny, it's still a problem -- just a manageable one.

Resolving this unfunded liability has a cost of only about 1.89% of taxable payroll if action is taken today to fix the hole in the current system.

Ah-ha! The system isn't the problem, the workers just aren't taxed enough. Instead of 12.4% of our wages going to SS, we should have over 14%
taken away. This is called relieving the symptoms and not the illness.

This means that, rather than messing with social security and privatizing it, there are more sensible and reasonable ways to reform it in the context
of the current pay-as-you-go system.

Never mess with our precious system! Never!

Specifically, authors such as Diamond and Orszag have proposed a combination of reducing modestly benefits and increasing modestly the payroll tax
that fully fixes the $10 trillion hole of unfunded liabilities of the current PAYGO system and makes it solvent forever.

Yes. That's just what I want: I want to be taxed more and recieve less. What about you?

if the young workers contribute less to social security when part of their payroll tax is cut and goes instead to private accounts, you still need to
pay for the benefits of the current old, retired and soon to be retired, who have earned their benefits via contributons while working.

Bad reasoning; not all young workers will contribute less to SS -- the private accounts are an option. Moreover, we're still recieving a cash
surplus until 2040ish, right?

Official estimates by the CBO and other reputable independent sources imply that introducing private accounts (a diversion of part of the current
payroll tax to private accounts as in one of the proposals in the Bush Social Security Commission) will increase the cumulative budget deficit by
about $114 billion in the first year, almost $200 billion a year after ten years and over $350 billion a year in twenty years (i.e. by over $5
trillion over the next three decades including the interest costs of the additional debt) ... the costs would be a multiple of $5 trillion.

Oh REALLY?
Let me quote the CBO,
"If the system used the same collection procedures now used for payroll taxes, there would be no additional costs for that task] (assuming the
private accounts were financed by payroll taxes at their current level; there could be some adjustment costs for employers and the SSA if the payroll
tax rate changed)."

Since actual legislation has not been written yet, we do not know exactly which method they are going to use -- thus, all things included the
situation I just presented are speculation.

Third, a social security privatization financed by debt (increased deficits) is, as even the strongest supporters of privatization like Larry
Kotlikoff admit, only a shell game that does not lead to the benefit of increased national savings and capital accumulation in the long
run....

This portion is based on a bad premise. Social security privatization will not necessarily be financed by debt.

In other terms, those who argue that privatization would allow young workers in the new system to earn higher returns on equities rather than the
miser returns of the current PAYGO system are totally misleading the economic facts.

Or he is arguing under a bad premise. Let's do some contrary math:

"Economic theory holds that private capital investment should provide a higher rate of return than a mature PAYGO Social Security system. If one
accepts the Social Security Administration’s assumptions about future bond and stock returns, a balanced portfolio (50 percent stocks, 30 percent
corporate bonds, and 20 percent government bonds) could be expected to yield a return of 4.9 percent. Subtracting 30 basis points of administrative
costs provides a net yield of 4.6 percent.

...

On a cohort basis, there is no contest. Clearly, the 4.6 percent return to private capital markets exceeds the 2 percent or less available through
Social Security. This return amounts to a substantial amount of money for the average worker. To provide a vastly oversimplified example, a worker
earning $30,000 per year will pay $120,000 in Social Security taxes over a 40-year working lifetime. A 2 percent return on that money yields Social
Security benefits equivalent to $185,000. But a 4.6 percent return would yield $344,000, nearly twice as much."

That was just from the conclusion section; for an interesting read, see the .pdf article.

It is true there is a 10 trillion dollar implicit liability in the current not fully funded PAYGO system but, as discussed above, the problem is not
as scary as it is often made: resolving this unfunded liability has a cost of only about 1% of GDP (in terms of permanent increases in payroll
revenues or reduction in benefits) if action is taken now. Indeed, Diamond and Orszag have proposed: a combination of reducing modestly benefits and
increasing modestly the payroll tax that fully fixes the $10 trillion of unfunded liabilities of the current PAYGO Social Security system and makes it
solvent forever.

Yep, again. He admits it is a problem, and could easily be solved by taxing you and I more, and cutting our benefits.

Suppose that these transition costs are another $5 trillion over the next few decades.

Again, working under bad assumptions.

So, the private accounts do not lead to greater national savings nor they lead to more investment in stocks and capital: the whole privatization ends
up being a different way for those private accounts to purchase the same government debt that is now purchased by the current PAYGO social security
system. So, social security privatization becomes again a pure "shell game" with no real effect on the economy.

...

And the argument that the higher return on equities in the private accounts will square the circle is, again, accounting-wise and economic-wise false.
In fact, any scheme - i.e. either fixing the current PAYGO system or privatizing - requires reducing the benefits (or increasing the contributions)of
the current young (prefunding); so, the two schemes are conceptually equivalent in that dimension. And either solution has not effect (or has the same
effect) on national savings.

This depends on the set of premises you use, as I have shown. Of course, each side will use premises more favorable towards their core belief.

The article, for the most part, is Rubbish: great reasoning using horrid premises in order to scare people away from a politically heated plan.
Though, isn't that the definition of political rhettoric?

In summary, thus article says "If privatization is done specifically like X, then horrible Y things happen. Since we need to fix social security,
let's not change it but just help the symptoms of it: raise the amount we need to contribute to social security, and reduce the amount we get out of
it."

It seems that the beast is going to cause a very nice fight in Capitol Hill, it seems that some prominent groups are getting together to fight the
government program and on the site a group of "pro security reform" will be handsomely paid by donations to promote it.

So get ready because is going to be dirty and tricky. I can wait to see the commercials and the brain washing.

Originally posted by radardogDoes anyone else feel screwed by that solution?

Very simply , I do.

Why do these people not think that the Chilean folks got it right? I don't know about you but I would rather retire when I am 55 and enjoy the 20
years instead of working till I am 70 and getting 2 years in a nursing home and still have to pay Medicare premiums...

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